Employers continue to face mounting pressure from rising medical costs, with average increases expected to range from 6% this year to 7.5% in the coming year. Self-insured employers are responsible for their employees’ healthcare claims. This growing burden makes it more important than ever to keep track of healthcare spending.
Healthcare claims processing involves complex interactions between automated systems and manual reviews. Industry standards for acceptable error rates range from 1–3% of total claims or dollars, depending on the performance metric. For example, the industry standard error rate for Financial Accuracy, which measures the percentage of total claim dollars paid incorrectly, is 1%. Therefore, even industry standard error rates can translate to millions of dollars being paid in error for a self-insured employer.
Healthcare benefit plans represent one of the largest unaudited operating costs for many employers. Administrators that manage these substantial expenditures typically self-report their performance. These internal audit results are typically more favorable than third-party audit results. In fact, third-party audits often identify performance that’s below industry and contractual standards. One factor in these disparate results is often the administrator’s assumption that the client’s plan design is loaded correctly in their claims system, whereas third-party audits rely on plan documents (e.g., Summary Plan Descriptions) to judge the accuracy of claims adjudication.
The Employee Retirement Income Security Act of 1974 (ERISA) sets strict standards of conduct for fiduciaries who manage employee benefit plans. Under ERISA Section 404, plan sponsors have a basic fiduciary duty to act “solely in the interest of the participants and beneficiaries” and for the “exclusive purpose” of providing benefits and defraying reasonable expenses of administering the plan.
This fiduciary standard creates legal responsibilities that extend far beyond overpayment identification and cost containment.
The duty of loyalty under ERISA requires plan sponsors to act impartially toward all plan participants. This means ensuring that all claims — not just overpayments — are processed correctly. When a plan sponsor only focuses on recovering overpayments while ignoring underpayments, they don’t meet this responsibility. When plan underpayments occur, this can result in the member inappropriately paying for employer expense liabilities.
Consider the implications: when providers are underpaid on claims, participants may face incorrect cost-sharing through deductible, coinsurance and copayment design features, unexpected balance bills, provider refusals for future services, or disruptions in care networks as providers leave due to payment issues. These situations can create financial burdens for participants, limit their access to care and lead to worsened health outcomes. A fiduciary acting solely in participants’ interests must be concerned with these outcomes, as they directly impact the effective delivery of plan benefits.
ERISA requires fiduciaries to act “with the care, skill, prudence and diligence” that a prudent expert would use in similar circumstances. This “prudent expert” standard necessitates comprehensive oversight of plan administration that examines all aspects of claims processing:
A prudent expert would refrain from limiting evaluation to financial errors that would favor the plan sponsor, to the financial detriment of the plan’s members. Instead, they would implement systems to support a holistic framework that evaluates both overpayments and underpayments, as well as nonfinancial errors that impact the participant’s experience.
While financial accuracy is crucial, ERISA compliance equally extends to nonfinancial aspects of plan administration. The Department of Labor regulations establish standards for:
Failures in these areas can constitute breaches of fiduciary duty even when they don’t directly impact the plan’s finances. A comprehensive audit approach must therefore examine these administrative functions alongside financial accuracy.
Payment integrity (PI) vendors and cost containment services are becoming more common in the healthcare industry due to their ability to address the growing challenge of overpayments. These solutions are designed to find and recover overpayments. This can be an impactful lever as employers deploy cost-containment strategies. PI vendors usually focus on post-payment processes. They offer specialized capabilities such as claims editing, reimbursement analyses, payment recovery and fraud detection.
While PI vendors play an important role in recovering overpaid dollars, their scope is limited when it comes to fulfilling an employer’s broader fiduciary responsibilities. Their focus on overpayments, coupled with compensation models like contingency-based arrangements, may introduce biases and potential conflicts of interest. The focus on recovering overpayments deals with the fiduciary duty to preserve plan assets, but it doesn’t cover all the duties of a fiduciary.
A plan sponsor who relies entirely on payment integrity services may:
Given these considerations, a balanced audit that examines all aspects of claims administration — overpayments, underpayments and nonfinancial compliance — is essential to meeting the comprehensive fiduciary responsibilities established by ERISA.
If you’re seeking to fulfill your fiduciary responsibilities while controlling healthcare costs, a balanced approach is essential:
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Perform comprehensive, independent audits to meet fiduciary duties through an unbiased review of claim processing practices. To fully meet ERISA obligations, fiduciaries must implement a balanced approach that:
This balanced framework shows that the plan sponsor is acting "solely in the interest of participants and beneficiaries" as required by ERISA, rather than prioritizing the plan's financial interests.
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Use overpayment recovery vendors as a part of your cost containment, fraud, waste and abuse (FWA) efforts, but recognize their limitations:
While payment integrity vendors serve a role in healthcare cost containment, they represent just one part of a robust audit strategy. To truly fulfill fiduciary responsibilities, plan sponsors must implement comprehensive audit approaches that examine all aspects of claims processing, promote accuracy and fairness and enhance the member experience.
You can better manage the large financial investments you make in employee healthcare by using thorough audits and targeted cost recovery initiatives. You can also keep your promise to provide high-quality, member-focused care to your plan members.
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